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Abbey’s steep step get the thumbs-down

Abbey caused controversy this week after it launched a stepped rate mortgage at 2.99 per cent for the first year but the rate then more than doubles after 12 months.

The deal is aimed at those who need a bit of breathing space in their first year, especially first time buyers and returners to the market that may need the extra spare cash to buy furniture or accessories for their home.

Abbey says the five-year deal, which shoots up to 6.2 per cent in years two and three and 6.35 per cent in years four and five, is fully transparent and borrowers know exactly what they are entering into.

Advisers are not so sure and many have suggested Abbey is preying on the short-termism of certain clients by luring them in with a mega-cheap introductory offer only to later pile on the charges.

This is by no means the first such product in the market but it comes at a time when affordability pressures are at an all-time high. Also, the FSA warned lenders last year against deals that create such payment shocks after the first effectiveness review of its mortgage regime.

Leeds Building Society caused controversy last year when it launched a deal that began at 1.89 per cent but then shot up by 350 per cent.

One surprising element of the Abbey deal is that it works out at just over 5.6 per cent over the five years, with a £799 arrangement fee, which is a poor deal compared to other similar products. Cheltenham & Gloucester’s 1.99 first-year deal, that rockets to 5.99 per cent, works out at 5.19 per cent.

Another new product this week was GMAC’s deal, known as Merc, that includes a rate/redemption swap. This means that if the base rate rises then the three per cent early redemption charge reduces by the same percentage.

The deal, aimed at the adverse market, starts at 0.01 per cent below base rate until September 2010 and then rises to 1.99 per cent above base.

The feeling in the market is that it is generally a good deal although the £2,995 arrangement fee could be a problem for many borrowers.

The redemption/rate swap is not getting brokers excited and many see it as a gimmick – not a negative aspect that diminishes from the deal, but simply a meaningless feature as the rate is so good that borrowers are unlikely to opt out of it anyway in the first three years once they are in.

Finally, it was another bad week for Kensington as it revealed a disappointing first quarter of trading. It must be preying for its long-awaited buyer to help solve its troubles but, as yet, its knight in shining armour has not come in to rescue the damsel in distress.

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